EXTERNAL

SOURCES OF
FINANCE
 1. EQUITY SHARE CAPITAL
Equity is that part of capitalisation which is not a debt. It is ownership interest, the
residual claim to assets and earning and control with debt, which represents the first and
fixed claim on both assets and earnings. If interest and principal payments on debts are
not
promptly met when due, bankruptcy and loss of control for the owner may occur. Equity
Share Capital represents the basic and primary source of finance to any company. In
terms
of funds provided, the equity shares may provide lesser funds than some other source,
however, the relevance and importance of equity share capital cannot be undermined in
any case. The existence of equity share in the capital structure of a company is a fact of
life for the firm’s management and since it is an absolute prerequisite to the creation of a
company and an essential ingredient to its future growth.
 RIGHTS OF EQUITY
SHAREHOLDERS
(a) Voting rights of a member (Sec. 47): Holders of
equity capital are owners of the company. The money
invested by them do not mature at some future date,
they represent permanent capital which is expected to
remain with the company indefinitely. Holders of equity
capital receive voting rights that permit them to control
the affairs of the company. This voting right on a poll
shall be in proportion to the amount paid upon his/her
share. A member’s right to vote on a role may be
exercised by him personally or through a proxy.
(b) Right to sell or transfer equity shares: Equity
shareholders have the right to sell or transfer their holding
to other persons. The company cannot prevent such sales
or transfer and these actions in no way, affect the legal
existence of the company. The shareholder may directly
sell his/her holdings in the demat accounts, by merely
authorizing the Depository Participant (SP) and the buyer
shall get the entry in his/her demat account. It is not
essential that selling of shares has the background of
dissatisfaction, but high growth in the prices of stock
exchange price of shares may illure the shareholder to
sell.
(c) Residual claim on assets : The claim of the equity shareholders on the assets
of the company is secondary to the creditors and is relevant only when the company is
being liquidated. Sections 325/326/327 of Companies Act, provide that in case of
liquidation the assets are distributed first to the workmen’s dues government dues and debts
due to secured creditors shall be paid in full prior to all other debts. The sequence of
priority shall be
• all revenues, taxes, cesses and rates to the Central/State Governments.
• all wages and salaries of workmen.
• all accrued holding remuneration payable to employees.
• all amount due in respect of Employees State Insurance Act, 1948 for the 12 months.
• all liability in respect of Workmen’s Compensation Act 1932.
• all sums due to any employee for provident fund, pension fund, gratuity or any other fund for
the welfare of employees.
• The expenses of any investigation held in pursuance of Sec. 210 (the Central Government
may appoint inspectors to investigate the affairs of a company) or Sec. 213 (in the opinion of
National Company Law Tribunal the business of thecompany conducted to defraud
creditors/members).
Since the liquidation value of company is generally below their book values, the equity
shareholders may not receive the book value of their holding in the event of liquidation.
• (d) Pre-emptive right — Rights share (Sec. 62): The
right of rights issue or additional shares, before these
are offered to public is known as Rights Issue. It refers
to the rights of the shareholders to maintain their
proportion of the ownership of the Company by
subscribing to new shares being issued. It gives the
equity shareholders the privileges of maintaining their
voting rights and the proportionate shares in the
distribution of income assets of the Company.
• (e) Right to receive Annual Report (Sec. 136):
Section 136 of the Companies Act 2013, requires that
the annual report (comprising balance sheet/ profit and
loss account/ director’s report/auditors’ report/and other
annexure) should be sent not less than 21 days before
the general meeting, to every shareholder. The Listing
Agreement and the SEBI Guidelines also require that
quarterly and half yearly results of operations should
be made public by the company.
 2. PREFERENCE SHARE
CAPITAL
It is a share capital through which a company obtains
funds in exchange for certain types of preferential
treatment to its holders which are not available to equity
shareholders. Such rights are:
(i) Dividend at fixed rate will carry a preferential right.
(ii) On winding up/repayment of capital, a preferential
right to be repaid the amount of the capital paid or
deemed to have been paid.
FEATURES OF PREFERENCE
SHARES
(i) It is a part of share capital of the company.
(ii) No collateral or mortgage is required as in debt.
(iii) Dividends at fixed rate is payable, so there is fixed
financial commitment.
(iv) Priority in profit distribution as well as asset
distribution.
(v) Equity shares with a limited voting rights as described
in Sec.
 KINDS OF PREFERENCE
SHARES
• 1. Cumulative Preference Shares & Non Cumulative
Preference shares
• 2. Participating & Non Participating shares
• 3. Convertible and non convertible shares
• 4. Redeemable & Non Redeemable Preference
shares
• 5. Cumulative Convertible Preference Shares
(a) Cumulative Preference Shares: If the company
fails to pay the dividend in a particular year, the
accumulated arrears of dividends shall be paid, if any
dividend is declared in SUBSEQUENT YEARS, before
any dividend is paid to the equity shareholders.
(b) Non-cumulative Pre-shares: Such shares do not
carry the right to receive the arrears of dividend in a
particular year, if the Company fails to declare dividend
in previous year or years, it lapses.
(c) Participating Shares: Fixed Dividends are paid but
the shareholders participate further in the distributed
profits along with the equity shareholders, after a certain
fixed percentage has been paid to equity shareholders
as well.
(d) Non-participating Pre-shares: These
shares are entitled to only a fixed rate of
dividend and do not participate further in the
SURPLUS PROFITS irrespective of the
magnitude of such profits.
(e) Convertible Pre-shares: The holders are
given the right of conversion of his shares into
equity shares at a later date.
(f) Non-convertible Pre-shares: There is no
right of conversion to shareholders. If the Articles
of Association are silent all preference shares
are deemed to be non-convertible unless
provided otherwise in the terms of issue.
(g) Redeemable Pre-Shares (Sec. 55): Ordinarily share capital
received on the issue of shares can be returned on the winding
up of the company only, but
under section 55, no irredeemable preference shares are
issuable from 1996 or
is redeemable after the expiry of a period of 20 years from the
date of issue.
(h) Irredeemable Preference Shares: No such shares are
issuable from 1996 by any company and all such shares issued
before 1988 were redeemed to share shareholders within 5
years or 10 years at the most.
(i) Cumulative Convertible Preference Shares (C.C.P.):
Cumulative Convertible Preference Share are a type of
preference shares where the dividend payable on the same
accumulates, if not paid. After a specified date, these shares will
be converted into equity capital of the company. after
conversion.
OBJECTIVES OF ISSUE OF CCP’S
The object of the issue of cumulative convertible preference
(CCP) shares should be for setting up new projects, expansion
or diversification of existing projects, normal capital expenditure
for modernization and/or working capital requirements.
QUANTUM OF ISSUE
The amount of issue of CCP shares should be to the extent the
company would be offering equity shares to the public for
subscription.
TERM OF ISSUE
CCP shares issued are regarded to be equity issue for the
purpose of calculation of debt-equity ratio. The entire issue of
CCP shares would be convertible into equity shares between the
end of 3 years and 5 years as may be decided by the company.
DENOMINATION
The face value of CCP shares would ordinarily be N100.
 3. PUBLIC DEPOSITS
(a)A company can accept deposits from
the public to finance its medium- and
short-term requirements of funds. This
source has become very popular off
late because companies offer higher
interest than the interest offered by
banks. Total public deposits cannot
exceed 25 per cent of the paid up capital
and free reserves of the company.
• Any member of the public can fill up the prescribed
form and deposit the money with the company. The
company in return issues a deposit receipt. This
receipt is an acknowledgement of debt by the
company. The terms and conditions of the deposit
are printed on the back of the receipt. The rate of
interest on public deposits depends on the period of
deposit and reputation of the company.
• A company can invite public deposits for a period of
six months to three years. Therefore, public deposits
are primarily a source of short-term finance.
However, the deposits can be renewed from time-to-
time. Renewal facility enables companies to use
public deposits as medium-term finance
4. DEBT FINANCING
FEATURES OF DEBENTURES :
(i) Holder is the creditor of the company.
(ii) Debt securities promise a rate of interest payable half yearly. The rate of
interest is also denoted as COUPON RATE.
(iii) Debenture may be unsecured (if less than 18 months period) and
secured one.
(iv) All debt instruments have fixed maturity period.
(v) Holders do not get voting rights in normal situations.
(vi) Every debt instrument has a face value as well as maturity value.
(vii) In liquidation of company, the claim of debt holders is settled in priority
over all shareholders and unsecured creditors.
TYPES OF DEBT:
(a) Unsecured debentures and Secured
debentures
(b) Redeemable and Perpetual
Debentures
( c) Convertible and Non-convertible
Debentures
(d) Bearer and Registered Debentures
(e)Zero interest convertibles & Zero
interest non-convertible